GROSS MARGIN MANAGEMENT FRAMEWORK FOR MERCHANDISING DECISIONS IN COMPANIES WITH LARGE ASSORTMENT OF PRODUCTS

Abstract

Gross margin management is a complex task as gross margin can’t be too high or too low in order to deliver maximum sales and profit.

Objective of the article is to present framework which allows understanding and managing gross margin and gross profit in companies with large assortment of products. The framework has defined basic margin variances – pricing, cost, volume and mix. These variances enable to understand and interpret strategic and merchandising decisions of the company. Formulas are presented which translate specific merchandising decisions impact on gross margin and gross profit, formulas allow to simplify calculations without the need to recalculate all assortment on product by product basis multiple times.

Derivations of algebraic formulas are used to obtain gross margin variances impact on gross margin and gross profit.  Cause and effect model is used as a method to integrate gross margin variance into the gross margin management framework. Boston Consulting Group matrix principle is used to establish and analyse typical gross margin management situations and interpret behavior of customers.

Conclusions – companies with large assortment of products have to manage financial results and gross profit through gross margin management by evaluating merchandising decisions impact on both gross profit and gross margin. Four gross profit and margin variances – price, cost, volume and mix, need to be used to understand business situations related to gross margin management and these four variances can be used as building blocks to analyse specific merchandising offers and strategic decisions.

The type of the article: Methodological article

JEL Classification: G39, M49.

DOI: http://dx.doi.org/10.5755/j01.em.18.1.4116